Malaysia Steel Works (KL) Bhd
(March 2, 88 sen)
Upgraded to outperform call with an unchanged target price (TP) of RM1.10. Malaysia Steel Works (KL) Bhd (Masteel) reported a core net profit of RM24.2 million for the financial year ended Dec 31, 2014 (FY14) after stripping out RM7.5 million in unrealised foreign exchange  (FX) losses. 

The results surpassed our and consensus forecasts by 13% and 5% respectively. Surprisingly, no dividend was declared for the quarter. 

We upgrade Masteel from “neutral” to “outperform” with an unchanged TP of RM1.10, given the more than 37% potential upside to our target price which is an inexpensive 10 times multiple to FY15 earnings per share (EPS).

Its current share price is also trading at a 64% discount to its current book value of RM2.44 per share.

The company would have made RM13.1 million compared with RM3.6 million last year after stripping out FX losses. 

Pre-tax margin increased slightly from 1.1% to 1.6%. We believe the higher earnings margin is attributed to lower scrap metal cost (year-on-year [y-o-y]: -23%; quarter-on-quarter, [q-o-q]: -9.3%), which has fallen at a larger pace than steel prices (y-o-y: -18%; q-o-q: 3.8%).

Management guided that its bar sales volume will increase 10% for 1HFY15 upon the commissioning of the new rolling mill in 2QFY15. 

Meanwhile, earnings margin is expected to improve in the coming quarters attributed to: i) continued decline in scrap prices; ii) the 5.8% reduction in electricity tariffs from March till June 2015; iii) higher production volume; iv) suspension of natural gas price revision by the government; and v) Chinese steel imports bottoming out. 

Meanwhile, the company does not see any material impact from the impending imposition of the goods and services tax on the company’s products.

Update on the rail project. The Ministry of Transport will speed up the reviewing and updating of the project and recommending its retabling to the Economic Council by this year. — PublicInvest Research, March 2

This article first appeared in The Edge Financial Daily, on March 3, 2015.